O'Malley Mulls Tax Hikes to Offset Federal Cuts

BRACING FOR CUTS: Maryland Governor Martin O'Malley has opened the door to tax increases, the Baltimore Sunreports , but probably not before Congress decides on how it will cut spending in response to this summer's debt ceiling deal. O'Malley said that a tax increase is possible in next year's legislative session, after the congressional "super committee" devises a plan to reduce federal spending — reductions that could hit Maryland hard given its proximity to the nation's capital. O'Malley, who signed a major income and sales tax increase in 2007, signed a budget without broad-based tax increases this year. But now Maryland faces a new looming $1 billion shortfall.

TO THEIR CREDIT: Maryland isn't the only state where the prospect of federal austerity is weighing on state officials. Virginia Governor Bob McDonnell is asking legislators to create a new, more flexible reserve fund to cope with the possibility of federal budget cuts, the Associated Pressreports . Virginia does have a rainy day fund, but it's available only to fill budget gaps that emerge mid-year, not to help form the budget before a new fiscal year begins. McDonnell says the new fund — he's asked the legislature for $30 million — would help preserve the state's AAA rating even as the federal government cuts back.

Meanwhile, the Tennesseanreports that Tennessee is trying to prove to rating agencies that its budget will be sound even if large federal cuts are made. State agencies are planning what they would trim if federal spending fell by 15 to 30 percent. Those plans will be part of the state's case for keeping its AAA rating from Moody's and Fitch (Standard & Poor's rates Tennessee AA ) when state officials go to New York in September. During the debt debate in Congress, Maryland, Virginia and Tennessee were all on a list of states that Moody's said were especially vulnerable to a federal default because of their dependence on federal spending. Fitch downgraded New Jersey last week, but that decision focused mostly on the state's economy and public employee pension funding, the Star Ledgerreports .

THE TAX MAN LEAVETH: As Connecticut works to implement and enforce 118 tax changes approved my lawmakers this year-including major tax increases-the state's revenue agency is shrinking, the Connecticut Mirrorreports . Commissioner of Revenue Services Kevin B. Sullivan says his agency might have dozens of veteran employees leave as state workers exit before new limits on retirement benefits go into effect. The department already has more than 300 fewer employees than it did 20 years ago.

RESPECTING ELDERS: Hoping to persuade more seniors to make Maine their permanent residence, Governor Paul LePage wants to eliminate the income tax on pensions, the Portland Press Heraldreports . LePage said he's concerned that wealthy seniors that split time between Maine and Florida or Nevada are spending more than half the year in those states because they lack income taxes. Some legislators responded cautiously to the idea, citing the revenue the state would be giving up.

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